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A surprise fall in India’s trade deficit in September has led economists to question whether domestic demand is weakening.

The gap between exports and imports stood at $13.98 billion, sharply lower than a five-year high of $17.4 billion in August. Import growth slowed to 10 percent in September from over 25 percent last month. Exports contracted by 2.2 percent compared to 19.3 percent growth in August.

Imports Responding To Weaker Rupee?

Economists noted that slower import growth despite higher oil prices could reflect a weakening of domestic demand conditions. In particular, growth in non-oil, non-gold imports fell to just 1.2 percent in September from 12.8 percent in August. The slowdown in this “core category” of imports ahead of the generally buoyant festive season could suggest that demand is adjusting to higher prices driven by a weaker currency, said Nomura Global Markets Research in a report.

The mix is puzzling: exports contracted sharply both in year-on-year terms and sequentially, despite the sharp depreciation of rupee; while imports moderated despite high oil prices and expected festive demand for gold. These point towards a potential moderation in domestic growth and a faster-than-expected adjustment to the weaker currency.

Sonal Varma, Chief India Economist, Nomura Global Markets Research.

Tushar Arora, senior economist at HDFC Bank, pointed out that the month-on-month momentum of core imports was also contrary to seasonal trends.

“Instead of the general pre-festive bounce (average increase in the September month has been around 4.1 percent), non-oil non-gold imports contracted by 4.5 percent MoM this time around,” Arora wrote in a research note.

The categories that saw a year-on-year decline included items like rice, cashew and ready-made garments. Coal imports dropped 10 percent month-on-month and machinery imports fell 23 percent month-on-month, Arora said. Electronic goods imports, on the other hand, continued to be strong and rose 2 percent sequentially.

Going by the items that led to a surprise and lower import growth, there are signals of some slowdown in the economy. Coal and capital goods imports like machinery are early indicators in this regard. While it may be too early to judge, it’s important to remain watchful of this trend going ahead.

Tushar Arora, Senior Economist, HDFC Bank.

Export Weakness Not A One-Off?

On the export end, economists weren’t convinced that the fall was related only to a high base effect. In a statement on Monday, the government said that the fall in exports is a “temporary out of trend phenomenon” due to a spike in exports in the same month last year.

Varma of Nomura pointed out that exports were weak on a sequential basis, too.

Exports contracted by 3.2 percent month-on-month (seasonally adjusted) in September after 4.4 percent growth in August, despite the sharp rupee depreciation. “This suggests weak global demand may also be a factor—with both price and volume growth falling on a three-month moving average,” Varma wrote.

The decline in exports was broad-based across commodities, manufacturing and agriculture. Within manufacturing, labour-intensive industries like gems and jewellery and textiles have seen exports decelerate, after a shallow recovery over the past three months, Nomura said.

Exports may remain sluggish due to global demand conditions and a tendency towards protection, said economists, while adding that this may balance out any positive impact of a weaker rupee.

Going ahead, we expect exports growth to remain lackluster. Apart from a high base, a soft patch in the global economy (global PMIs and world trade volume have weakened in recent months) could outweigh gains from rupee depreciation.